COVID-19 Cafeteria Plan Relief: Mid-Year Elections and Extended Claims Period

In response to the COVID-19 pandemic, employers now have an opportunity to temporarily adjust cafeteria plan rules under Section 125 of the Internal Revenue Code (“Section 125”).  IRS Notice 2020-29 allows employers to temporarily permit employees to make mid-year election changes related to health coverage, health flexible spending arrangements (“health FSAs”), and dependent care assistance programs (“dependent care programs”).  An extended claims period is also available to apply unused amounts in health FSAs and dependent care programs to pay expenses incurred through December 31, 2020.

If adopted by plan sponsors, employees may immediately change current enrollment elections to support unanticipated changes in the need for medical care, medical expenses or dependent care expenses.  This relief permits employees to:

1. make an initial election to the extent the employee previously declined coverage;
2. change an existing election;
3. revoke an existing election*; and
4. decrease or increase an election applicable to health FSAs and dependent care programs.

*Revocation of an existing election requires attestation in writing that the employee is enrolled, or immediately will enroll, in other health coverage.  Employers may determine the extent to which such election changes are implemented, provided that any election changes are only applied on a prospective basis, and the changes comply with Section 125 nondiscrimination rules. 

The extended claims period for health FSAs and dependent care programs permits employees to apply unused amounts remaining as of the end of a grace period ending in 2020 (or a plan year ending in 2020) to pay or reimburse expenses incurred for the same benefit through December 31, 2020.  This extension is available both to plans that have a grace period, and plans that provide for a carryover.  Importantly, individuals who utilize the extension will not be eligible to contribute to a health savings account (“HSA”) during the extended period (except in the case of an HSA-compatible health FSA) due to an implied extension of coverage by a health plan that is not a high deductible health plan for HSA eligibility purposes.

Employers may immediately change cafeteria plan operations prior to adopting a plan amendment.  However, employers are required to communicate plan changes to all eligible employees and must formally amend their legal plan document on or before December 31, 2021, effective retroactively to January 1, 2020.

Please contact an attorney from Honigman’s Employee Benefits practice group for advice on how to adjust your cafeteria plan design to comply with the COVID-19 relief discussed herein.